“Tis the season to be jolly…” Yet some havemore reason for being jolly than others. Take E. Stanley O’Neal,who recently brought home more than US$161.5 million after leavingthe financial management firm Merrill Lynch. Or his successor as chief executive, John A. Thain,who’s expected to rake in around $120 million for the nextcouple of years, if everything goes by the playbook. It’s easyto continue the rant, but the challenge lies in determining whetherthere is a basis for it or not. Nowadays, are corporate executivesoverpaid, underpaid or, as the fairytale goes, are they paid “justright”?

That is a question, I’m afraid, this article won’tbe able to answer for any concrete case. To do so, we’ll haveto be second-guessing the judgment of corporate boards and their paycommittees, duly advised by consultants, not to mention the views ofhundreds of thousands of shareholders or even that of the market atlarge. But what we could do is to provide some ethical perspective,however modest, that could help shed light on the issue.

The first thing to consider is what exactly areexecutives paid for and how. The standard response consists in sayingthat they are paid for their performance in delivering investorreturns, which usually translates into an increase in share price.Consequently, an ever greater proportion of executive compensationcomes in the form of stock options. On that count, O’Neal’spackage would indeed be hard to justify, given his legacy of a $2.2billion loss and an additional $8.4 billion mortgage-causedwrite-down at Merrill Lynch in the third quarter of this year.Unfortunately, such an anomaly happens to be more of the rule thanthe exception, with the practice of “golden parachutes”—the farewell equivalent of the “golden handcuffs”,as those offered Thain at his welcome— becoming firmlyentrenched. No prize for discovering who foots the bill for all thiscorporate largesse.

Perhaps we should be trying to rid ourselves of ourobsession with share price as the sole indicator of corporate, andtransitively, of executive performance. After all, an increase inshare price per se does not necessarily mean that a company isdoing well. It could be triggered simply by the announcement of somemassive layoff. And this certainly is odd, were we to believe what weare often told: that a company’s most important asset is itspeople. In that case, the price spike would be something like adead-cat bounce. Neither does a rise in share price automaticallyfurther the interests of all shareholder groups: some may preferdividends or greater investments in new products, businesses ormarkets. All of these may momentarily depress profits or marketvalue.

As we have already seen, the use of stock options as thepredominant form of executive compensation does not guarantee analignment of their interests with those of shareowners, employees andother stakeholders, much less with those of the company as a whole.They tend to exaggerate the executive’s role in value-creation,bucking the trend in managerial theory according to which corporatesuccess is, above all, the result of a team effort. Moreover, theytend to encourage short-termism among executives, eager to cash in atthe company’s own expense. This seems to be the only foolproofeffect of stock options-based incentives.

Another point to bear in mind is the social relevance ofexecutive pay, in the sense that it is never really just a matter ofprivate agreement. The fact that individuals sign a contract stating the termsand conditions in which one renders services to the other is notenough to make the contract just. The pay should also be sufficientto cover the worker’s needs, as well as those of hisdependents, in what has usually been called a “living wage”.Furthermore, justice requires a certain degree of equity orproportionality between one’s contribution to the corporateproduct and his compensation. This is always relative to thecontribution and compensation of the others in the company. In thisrespect, the fact that a typical Fortune 500 CEO now earns 364 times the earnings of anaverage employee may very well be unconscionable.

A frequently overlooked matter in evaluating executivecompensation is its impact on what people, in the end, are after:happiness or a flourishing life, something which, apparently, couldnever be achieved as an isolated individual, apart from others. Workprovides us with income, but will an increase in income buy usgreater happiness? After all, as human beings that is what weultimately seek.

A host of recent studies* uncover the fallacy behind the widespread notion that income andhappiness go together, inasmuch as higher income expands anindividual’s opportunity set, that is, the goods and serviceshe can consume. Defenders of this position argue that as soon as anindividual is no longer interested in the commodities, he could thenalways dispose of the surplus, since an expanded opportunity set doesnot entail an obligation to consume anyway. However, empiricaleconomic research enriched with inputs from psychology reveals thatthe case is not as straighforward as it seems.

At low levels of development, income indeed providessubjective well-being. But beyond a certain threshold —anaverage income of US$10,000 per head— income ceases to have anysignificant effect on country-wide levels of happiness. Therefore,happiness is not merely a matter of having disposable income andknowing where to shop. Neither is subjective well-being primarily anissue of rising incomes over fairly short periods of time. In manyindustrialized countries, although income per head has risen sharplyin recent decades, the proportion of people who consider themselves“very happy” has nevertheless fallen steeply. That ismainly because people’s aspiration levels surge even more than their incomes, coupled with the experience that theyquickly get accustomed to advancements in comfort levels. Forinstance, at first, getting a TV set, albeit in black and white, wasthe big thing. But then came colored TVs, VCRs, cable TV,satellite TV, HDTV and so forth. The extra pleasure that additionalmaterial goods initially provided rapidly vanishes as soon as theprocess of hedonic adaptation kicked in. Our achievements always fallshort of our aspirations and expectations.

Even when comparing people who live in the same affluentsociety such as Switzerland, for example, one finds that those withhigher incomes are not happier than those with lower incomes. Thisseems to be due to the fact that people cannot help but comparethemselves to others, so much so that it is not the absolute level ofincome that matters, but one’s position relative to a referencegroup. Simply raising everyone else’s income would not do thetrick. Rather, it lies in choosing the right referencegroup with which to compare oneself. The lower the income of thegroup chosen, the happier one is, apparently. And there would be nogreater cause for disappointment —at least for theultracompetitive— than when your spouse or another householdmember or a close relative (your sister’s husband, forexample)— earns a lot more than you. Leave it to the green-eyeddevil to let all that extra money go to waste.

In the end, perhaps it’s not so much a matter ofgetting the Goldilocks income as knowing what to do with it.Happiness cannot be reached by just earning and spending. That’swhy it’s priceless. What people are really after arenon-material goods. It should come as no surprise that they getdisappointed when material things fail. I wonder if O’Neal andThain have ever given this any thought.

Dr Alejo Sison holds the Rafael Escolá Chair of Professional Ethics at the University of Navarra in Spain.

 * Richard A. Easterlin, “Happiness in Economics”,Cheltenham,UK/ Northampton, MA, USA: Edward Elgar, 2002; Bruno S.Frey and Alois Stutzer, “Happiness and Economics”,Princeton, NJ: Princeton University Press, 2002; Richard Layard,“Happiness. Lessons from a New Science”, London:Penguin/ Allen Lane, 2005; Anthony Kenny and Charles Kenny, “Life,Liberty and the Pursuit of Utility. Happiness in Political andEconomic Thought”, Exeter: Imprint Academic, 2007 amongothers.

Alejo Jose G. Sison

Alejo José G. Sison teaches ethics at the University of Navarre and Georgetown. His research focuses on issues at the juncture of ethics, economics and politics from the perspective of the virtues and...